The Trade Game

Trade Surplus: Where the value of exports exceeds the value of imports.

Trade Deficit: Where the value of imports exceeds the value of exports.

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The European Union and the Euro Area

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The European Union and the Euro Area

Disadvantages:

1)Economies of Scale problems: Large, established monopolies will be operating at very low average costs and selling products at low prices. This predatory pricing will act as a barrier to entry and stop infant industries from setting up.

2)Some countries may benefit more than others; FDI may be directed into the middle of the single market ares and so countries on the periphery may benefit less than those in the centre.

3)Possible Job Losses; with free movement of labour, firms may relocate labour-intensive parts of production to areas where labour is cheapest. this will benefit the company, allowing them to lower costs of production and therefore prices and hence increase their price competitiveness, it is likely to cause job losses and unemployment.

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The European Union and the Euro Area

Explain and Evaluate the advantages and disadvantages of the single currency:

Advantages:

1)Elimination of Exchange Rate risks; using the same currency ensures there is no danger of the value of a good changing between when a good in bought and when payment is made, increasing trade.

2)Price Transparency; it is easier for consumers and firms to compare prices and so get the best value for money.

3)Long-term planning; information is clearer for just one currency so it is easier for firms to more accurately plan for the future.

4)No transaction costs; when there is only one currency, there are no transaction costs, so money is saved and trade increases.

5)Single Monetary Policy; the ECB sets one interest rate, so there is increased certainty for firms when borrowing money for investment.

6) Employment; One currency makes free movement of labour easier.

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The European Union and the Euro Area

Disadvantages:

1)Sensitivity of Interest Rates; the UK sets its interest rate for just one country so it is able to set a more universally beneficial rate than the ECB, which sets one interest rate all countries in the EU.

2)Recession; in the event of recession, the UK is able to respond much more quickly to cut interest rates in order to stimulate the economy than the ECB.

3)Changeover and set-up costs; the cost of changing from sterling to the Euro would be high.